Paying the Price of Reform

Angela Merkel’s poor showing in Germany’s recent election has now put into cold storage any hope of a serious overhaul of the country’s famously rigid economy. Tony Blair was waiting for her to help launch a drive to make the current British Presidency of the European Union a historical turning point for the Union’s economy. Now Blair has no project, and all would-be reformers are most likely downsizing their ambitions. Europe appears to be more stuck than ever. But is it?

To start with, the private sector is doing well. Technology travels fast and is swiftly adopted. Firms have responded to inhospitable conditions by cutting workforces and boosting productivity through more capital-intensive production processes and, when needed, by offshoring their capacities. The laggards are to be found only in the service industry, which is largely insulated from international production chains and even from internal European competition.

More fundamentally, there is no such thing as a “European economy.” The Union’s 25 member countries are very diverse. The Nordic countries are high-tech leaders; Spain has slashed its unemployment rate by half (it stood at 25% not so long ago); and the new members from Central and Eastern Europe are cruising briskly along a steady catch-up path.

The really sick countries are three of the EU’s four biggest: France, Germany, and Italy. But even they have carried out some reforms – not enough and too recently to make a difference yet; nonetheless, they have started to move.